Good evening, everyone, and welcome to Neogen Chemicals Q1 FY 2022 earnings conference call for analysts and investors. Joining us on the call today are senior members of the management team, including Dr. Harin Kanani, Managing Director, Mr. Anurag Surana, Director, and Mr. Ketan Vyas, Chief Financial Officer. We will commence the call with opening thoughts from the management team, post which we will open the forum for Q&A session, where the management will be glad to respond to any queries that you may have. At this point, I would like to add that some of the statements made or discussed on the conference call today may be forward-looking in nature. The actual results may vary from these forward-looking statements. A disclaimer to this effect is available in Neogen Chemicals' Q1 FY 2022 earnings presentation, which has been shared earlier.
I would now like to invite Dr. Harin Kanani to commence by sharing his thoughts on the performance and strategic progress made by the company. Thank you, and over to you, sir.
Thank you, Nishid. Good evening, and a warm welcome to everyone on Neogen Chemicals Q1 FY22 earnings conference call. We have shared our result documents earlier. I hope you got a chance to glance through them. I will briefly share my views on the performance of the company and the trajectory going forward. In the 1st quarter of fiscal year 2021, as the country was getting back to normalcy post the 1st wave of COVID-19 pandemic, the intense 2nd wave hit us in April and May. As you know, this time the surge was greater with significant rise in caseloads in a short span of time. Moreover, we witnessed challenges around higher logistic costs as well as some disruption in supply chain.
In this backdrop, I believe our team displayed tremendous agility to deliver resilient performance during the first quarter of FY 2021 as we boldly navigated through these emerging threats. We reported 11% growth in revenues with 20% improvement in profit after tax. To further break down our revenues, growth in organic chemical was at 3% to INR 68 crore in Q1 FY22, while revenue from inorganic chemicals came in at INR 17 crores, higher by 52% year-on-year. Let me reiterate that the demand trend continues to be favorable across key end user industries, we are using this lever to further strengthen our position in the market. Utilization levels across at our Mahape and Baroda plant remain at elevated levels, we are making all efforts to enhance our contribution from the value-added product portfolio.
This positive momentum is further supported by healthy recovery in economic activity across the country, as well as steep decline in COVID-19 caseloads. I will now share some updates on the organic chemicals facility at Dahej SEZ. Despite significant challenges and setbacks on the ground during Q1 FY2022, the trial commercial production has commenced and continued. We have now received approval from several international customers, including 2 CSM customers who have approved Dahej SEZ organic MPP for delivery starting Q2, and more customer approvals are expected over the year once we complete the trial production of some of the pharma products and submit data for their approval during the course of the year. Further, we expect 75% of our phase II reactor will come online sooner than planned by end of Q2, early Q3, and will further contribute to revenue partly in Q3 and more significantly in Q4.
Lithium prices worldwide have also normalized as compared to historically low levels in the second half of last financial year. Based on this development, the revenue guidance of INR 450 crore for FY 2022 remains unchanged. Once all reactors and support systems are fully commissioned in this year, this world-class, state-of-the-art facility will propel our performance as we will undertake assignments of complex multi-stage chemistries at this site. To conclude, let me share that the outlook is looking exciting for us. Our customers understand and appreciate the company's execution prowess and focused product capabilities, resulting in Neogen growing its market share and expanding its presence in both established as well as value-added product lines. We will continue to demonstrate profitable performance in the long term through relentless focus on leveraging our knowledge in complex chemistries.
Subsequent expansions will be modular, thereby limiting impact on our cash flows, and we will keep exploring novel opportunities to steer our momentum and maintain our leadership position in select chemistries. Now I would request our CFO, Mr. Ketan Vyas, to share his perspectives on the financial performance for Q1 FY 2022. Ketan, over to you.
Thank you, Dr. Harin . Good evening, everyone, and welcome on the call. I will briefly touch upon the key financial highlights of the company for the first quarter of fiscal year 2021. All comparisons are on a year-on-year basis and stand alone in nature. In Q1 FY2022, our revenues increased by 11% to INR 84.6 crore, which came in despite several challenges on ground. As explained by Dr. Harin , with respect to second wave of COVID-19 pandemic and other disruptions related to logistics and supply chain, scaling up of the new Dahej inorganic facility that was commenced in Q4 of FY 2020, helped the support of revenue momentum. EBITDA improved by 3% to INR 15.6 crore, translating to EBITDA margin of 18.5%, an expansion of 80 basis points.
High utilization levels at our plants help maintain overall cost and drive operating leverage. Margins expanded also due to favorable product mix during the quarter. Profit after tax stood at INR 7.4 crores, higher by 20%, which was supported by overall stable performance across business verticals. In Q1 FY22, our domestic and export mix stood at 52% and 46% respectively. That concludes my opening remarks, and I would now request the moderator to open the forum for questions from participants. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Anyone who would like to ask a question, you may press star and one at this time. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Manish Jain from Moneylife Advisory Services. Please go ahead. Manish Jain from Moneylife Advisory Services, your line is in the talk mode. Please go ahead with your question. We would request you to please unmute yourself from your mobile and go ahead with your question.
Yeah, sorry. Thanks for the opportunity. My first question is, what is the number of customers we are working with under contract manufacturing presently?
Customers with whom we've already worked so far, where we have supplied them or are supplying them product, that's more close to around 10 odd customers. There are additional, I would say, 8- 10 customers with whom we are discussing several projects.
Okay. Thank you. The second question is, what is the share of advanced intermediates with respect to the overall revenue in this quarter? Looking forward, how we are going to improve our share?
I think as we have shared earlier, the advanced intermediates usually contribute roughly around 20%-30%, 25%-30% range. Going forward, by FY 2024, when we have full utilization of the phase I and phase II capacity, we expect this percentage to increase to 40%. That's the target we've set ourselves.
Okay, thank you. That's from my side.
Thanks.
Thank you. The next question is from the line of Swarnabh Mukherjee from Edelweiss. Please go ahead.
Thank you. Hi, Harin, sir. Good afternoon. Hope all calm at your end.
Hi, Swarnabh. Yes, everybody is good here. Thank you for asking.
Great, sir. A few questions from my side. First of all, if we speak in terms of volumes that you have done for this quarter, how is it looking vis-a-vis last quarter and also Q1 FY 2021?
When we compare with regard to Q1 FY21, basically Q1 FY21 was the quarter in which we had lockdown. At the same time, we also had a overhang of Q4 FY20. Some of the sales which we couldn't complete of Q4 FY20 had a kind of overlap to Q1 FY21. We had more or less kind of covered that gap. If you remember, Q1 FY21 was already better as compared to Q1 FY20, in spite of the lockdown situation. The segment which was significantly affected in that was basically the inorganic segment, the lithium segment, which was going to engineering industry. In this quarter, we did not have the same challenges. Even though there was a COVID situation, but there was not as strict a lockdown as we had in Q1 FY20.
You can see that the lithium demand this year was slightly higher, and that's why you see a biggest jump, mainly because of the lower base in the last Q1 FY 2021, when there was a strong COVID-19 impact. That strong COVID-19 impact was not there in the lithium segment. When it come to Pharma and agro, that was more or less in line with our previous quarters, and even either Q4 or Q1. More or less in the line. A slight differential here was that, especially as compared to Q1 FY 2021, was that we had exports which were slightly higher, which was basically contributed by the two contracts, the long-term contracts which we already signed. That is why initial revenue which we had a post to our regular traditional customers and because of that, the export revenue also was slightly higher.
Right, sir. The reason why I asked this question was, I think in your presentation, you have also mentioned that the product mix has undergone a change and share of value-added products are going up. Now, in the organic front, it generally has been flat over the last four or five quarters, barring Q4. If we now look at it from the frame of reference of Q4 FY 2021, the slight dip that has happened, has that been due to any kind of fall in volumes because of the COVID-19 circumstances this quarter, or any realizations have gone down? How do we look at it from the perspective of also the mix of value-added products? If I understand it correctly, then a higher value-added product would have a higher realization. If you could throw some light on that.
I think if you are comparing between Q4 and Q1, last Q4 and this Q1, I think the only differential was basically the impact which we had on our production capacities in April and May. There was disruption, not as strong as last time, but there were some disruptions, and that led to a slight reduction in what we could produce. Overall, in general, we've always seen that in Q3 and Q4, our European demand for the pharma segment is always higher, because in July and August, they have this summer break in Europe, so they always want to build up inventory. Our exports to Europe in pharma in Q3, Q4 are usually higher. We see that demand also from our API customers who are basically serving Europe.
Therefore, these are just traditional factors where we always say that our Q1 is slightly weaker as compared to Q4. Nothing very strong directionally which will change or alter anything.
Okay. All right. Also, sir, in terms of your inventory, particularly finished goods side, was there anything that has been held up because of the shipping crisis that is going on, that has not been able to been sold and will probably ship to the next quarter, I mean, to Q2?
I think there was some impact in that, but I think the major contributor in terms of inventory, what you are seeing is Dahej now starting to build up inventory to support the sales which it wants. As we've mentioned, in Dahej already, commercial product, productions, trials, then we make some quantity and send it to customers for approval. All those activities have already started. The major contributor for the change in inventory is the Dahej production initiation that we have done.
Okay. All right. Now, sir, in terms of your geographical mix with Dahej, I guess we should be seeing the export share basically going up, going forward. Right now we are like 55% domestic, 45% export, this kind of range over the last few quarters. Do we see now export going up significantly over the next few quarters as Dahej ramps up?
Over a few years, yes. Some of the business which will immediately be filled in Dahej, of course, some of the new contracts also will contribute, and some also will be molecules which historically we were making maybe in Mahape or Karakhadi. Those customer approve Dahej site, then from Dahej site, we are supplying some of these products. Yes, over the next 2 - 3 years, we expect the export contribution to increase as more and more new customers get added at Dahej site.
Right. Any color on what that mix will eventually affect your tax rate?
I think I would let Ketan answer that. We had done some simulations, what the tax rate will go up to. Ketan, would you like to answer that?
Yeah. I think the effective for this year, we look at the end of the year, we formulate approximately the tax rate could come down by 2% or 3% overall.
maybe closer to around 25.
Closer to around 25, we look at the rate, basically.
I think previous simulation, we have seen that it can go down up to 20%.
Yeah, 20%, we have seen that simulation.
23% or 24%.
Yeah.
Okay. Just to clarify, if we take FY 2022 as a whole, then we'll see for the whole year a 2%-3% reduction compared to FY 2021. Is that correct? Am I understanding?
Yes.
Okay. That's very helpful. How are we positioned in terms of debt at the end of this quarter?
Debt is in line with what we have formulated. The figures at, just confirmation, our long-term debt stays about INR 130 crores, and that's what we look at currently.
All right. Okay. Got it. Harin sir, in terms of the customer approvals, one question that I had was you mentioned two CSM customers have approved. Are those amongst the long-term contracts? Whether we should then, from Q2 onwards, see a revenue for those long-term contracts trickling in?
The two long-term contracts we have is one is a CSM and another is non-CSM, right? The long-term CSM customer, yes. He has already approved this site, and it was actually right from the beginning, once that contract was confirmed, Dahej site was designed specifically. I mean, one part of the Dahej was specifically designed for that. Yes, the revenue from that will start coming in from Q2. Another is our historical customer with whom we have relatively decent volumes. They've also agreed to buy the product from Dahej. Even we are expecting in Q2 also initial trial production from Dahej, which they will accept, and then maybe in Q3 or Q4, there will be more volumes for these customers.
Then some of our own bromine derivative molecule customers also have already accepted the supply from Dahej and some of them have also placed the POs. These also will contribute in our Q2. We are also working, so some of the customers require us to prepare the final product, submit them the data on equivalency, and once they see this data, then in future they will give us. They've conditionally agreed to buy from Dahej. Once we give them the satisfactory data, then some more customers will shift to Dahej.
Great. Got it. That is very helpful. Sir, one last question, if I may squeeze in. This is a little bit big picture kind of thing that I wanted to take your view on. We are seeing that several companies, particularly ones who are operating in the manufacturing of agro-pharma intermediate space or specific chemical intermediate space. Everybody is building up competencies in multiple chemistries.
Yes.
That includes halogenation as well as other ones like, say, nitration, hydrogenation, ammonolysis. I think going forward in 3, 4 years or time, we'll see several of the major players having capabilities in all these chemistries or multiple of these chemistries. Maybe some of them might also have their capability in bromination. You will also have capabilities in other halogens or other chemistries.
Yes.
How do you see this competitive scenario change over a point of time, where right now each of you are basically having one pivot chemistry and then incrementally customers are looking for additional reactions based on the base product and giving the final product or one or two step upstream from the final product you are sending to the customers? How is this going to evolve maybe five years down the line with everybody having a large overlap in the chemistry competencies?
I agree, and we've also shared this in previous call that one of the expectations of majority of the customers is that they want to basically try to do as much steps in one single place so that they don't have to keep moving materials from state, like have 10 vendors for that. Especially when we are doing CSM. Even the existing molecules where we have a long-term contract, that is a six to seven-stage reaction where we are doing multiple chemistries. Over a period of time, yes, we all will have to do certain chemistries.
I think 5 years down the line, it will be depending on number 1, who can do a particular chemistry well, will still be a criteria where, let's say you want to do a molecule which has a very challenging bromination or very challenging fluorination or nitration is the most key step. Which is a key step and who has expertise or a bigger expertise in that. That is 1 criteria. The second thing will be who will execute the project well. It will be, if no key chemistry is required and chemistry is being equal, and equal capabilities of multiple players, the customer is going to make a choice based on who is delivering to them on time, who's delivering or who is able to innovate further. The experience of the customer has with working with you historically.
Those are the things which I guess would differentiate. I don't know, Mr. Surana, would you like to add to this?
What I would like to say, I always maintain that there is nothing like a pivot chemistry and other chemistries cannot be done. If you see already many companies like Neogen, they also do bromination. Where Neogen differentiates itself is that Neogen does a very large variety of bromination. Neogen has a very big strength in sourcing of bromine, in entering into long-term contracts for bromine, in bromine recovery and recycling of bromine and stuff like that. Similarly, companies like SRF and Navin Fluorine, they have strength in fluorine chemistry. In school or college or IIT, nobody teaches you bromination or fluorination or chlorination separately. You are taught synthetic organic chemistry. Any chemist which Neogen or for that matter any of the companies, when they employ a R&D Chemist or a R&D Manager or a Vice President of R&D, he knows all the chemistries.
All these companies are already doing it. It's not that they will do in the future all chemistries or multiple chemistries. They are already doing all chemistries.
In one or two chemistries, if they have some additional strong points, we like to showcase that as a matter of strategy which also Neogen does. I hope that answers your question.
Yes. That has been very helpful. That's all from my side. All the best to the Neogen team. Thank you so much.
Thank you, Swarnabh.
Thank you. The next question is from the line of Tarun from AMSEC. Please go ahead.
Yeah. Hi. Thank you for the opportunity. First from the employee cost. There has been a sharp increase in the cost. Is there any one-off component, or we should expect this rate going ahead?
Thank you for the question. No, especially when you compare with Q1, the increase is more sharp, and mostly because over last year we have added a lot of team members for better management. This is a reflection of that. As a percentage, we hope that once Dahej starts contributing as a percentage of revenue, it will improve slightly. Also there will be more employees of Dahej which will also get added. Yes, there is no specific one-off which has increased this. This is more a trend. Yes, as a percentage, it should improve. It will be higher as compared to last year.
Okay. Sir, in export, is there any orders in hand which was not delivered in Q1, and there will be deferred to Q2 because of logistic issue or something?
Yeah, there were a couple of orders, but not very large.
Okay. Sir, because of this logistic and supply chain issue, are you witnessing better demand on the domestic side and better realization that you are fetching on domestic side?
We've not yet seen, because generally we feel these pharma companies have a good inventory. The domestic major customers are pharma. The second is engineering. When it comes to pharma, we've not seen a better realization because of challenges in logistical constraints for them. There are no sudden orders that we want this at any cost kind of a situation because of the inventories which pharma companies are carrying.
Okay. Sir. If you can provide the utilization levels for the organic and inorganic segment for this quarter?
Organic products continue to run at about more than 80% in my Mahape and Karakhadi unit. Dahej, we've not yet started to kind of calculating percentage because the plant is stabilizing and currently all the trial commercial productions are ongoing, et cetera. When it comes to inorganic, see, roughly we say we have a capacity of around INR 25 crores per quarter. At INR 17 crores, we are let's say at around 60%-65% kind of utilization levels in inorganic.
Okay. Sir, how should we look at the Dahej plant ramp-up? Like it will start in Q2, whether it will be in the last month of this quarter, how the ramp-up will happen over this full year?
As I mentioned in my opening remarks, we are expecting that in this quarter, we should have the phase I capacity more or less working. By end of Q2 or early Q3, at least 75% of phase II reactors also are likely to come online. I would say that between Q2, Q3, and Q4, you will progressively see additional revenues kind of coming up, where at least by Q4, we hope 75% of the I mean the Q1 will be fully utilizable, and 75% of phase II also should be utilizable. Q4 should be the best quarter from capacity point of view. Of course, this still being a new site, my Mahape and Karakhadi, even though normal standard capacity utilization levels are 80%, run above 80%, go as high as sometimes 85% or 90% also. Whereas Dahej will take some time.
Next year and the year after, let's say we will be kind of hitting those kind of numbers. Overall, when we have kind of targeted INR 450 odd crore, our bare minimum expectation is to at least cross INR 100 crore in Q2, and then further ramp up in Q3 and Q4 beyond that.
Okay. Sir, my last question on the gross margin, EBITDA margin. From last two quarters, we have seen a gross margin improvement and while EBITDA margin has improved marginally compared to what we have seen in gross margin because of the value-added products addition, as you mentioned last quarter. How should we look at in terms of gross margin going ahead? Is this 45% kind of a gross margin will be sustainable going ahead?
That's something once our product mix stabilizes, we'll have a better answer. The way it currently looks, at least in this year, we are expecting in the range of 40%-45%. I mean, we used to be between 38%-42% historically. With these new products, with longer processing times, and those changes in the product mix, we currently instead of 38%-42%, the range which I'm currently looking at is let's say 42 ± 2%. Before it was 40 ± 2%. Now it is more like 42 ± 2%. Again, the processing costs are also higher. We'll see. Let us stabilize a bit because we are making a very big dramatic change in this year. I'll be able to give you a more better clarity going forward.
Okay. Sir, just one bit on the working capital. Is there any material change compared to the last quarter or similar to the last quarter?
Yeah, similar, except as I explained earlier, the inventories are a bit higher because. We are now preparing for the Dahej site. Some of the raw materials, also some of whatever is in process is all out there.
Okay. Thank you for your answer.
Yeah. Thank you.
Thank you. The next question is from the line of Nilesh Ghuge from HDFC Securities. Please go ahead.
Yeah. Good evening, sir. This is Nilesh here from HDFC.
Good evening, Nilesh.
Yeah. Sir, you always guided us that you are targeting top line of about INR 650 crore-INR 675 crore by FY 2024. Out of that, you are expecting that 20% business should come from custom synthesis. That's your target. That means about INR 120 crore of top line will be coming from the custom synthesis. Correct, sir?
Yes.
Sir, just to clarify. That means when you say custom synthesis, does that mean that the business generated on the technology and the process developed by Neogen Chemicals? Is my understanding correct?
No. When we say CSM business, we basically mean, or at least we classify as a CSM business, where we have a one-on-one exclusive relationship for a product for that customer, specifically for a geography. That is what we mean as a custom synthesis business. In this, there are various cases. There are many cases where the customer gives me just the name. He has a name and he says, "This is what I want you to make, but it's a patented molecule, so you make it only for me." It can be just that. Sometimes they have made it few grams or few kgs in lab, and they say, "This is what I've done.
Use this as a starting point and make the final molecule." I mean, scale up the molecule, develop the technology at the commercial scale, and then you supply to me over a few years. We also have some customers who say, "I've been making this for last 10 years, 15 years, but I want to free up my capacity. I even have a plant-level data. Can you make this exclusively for me?" We can get technology anywhere from just the name to actual plant manufacturing technology. The level of technology that we get and the level that we need to develop can change from 10% to 90%. Yeah, when we are doing it specifically for one customer, we call it a CSM business.
Okay. sir, the two contracts, the long-term contracts I'm talking about.
Yeah
You already signed and you already started dispatching products also. Does this long-term contract revenue will come under this CSM business?
One of them is part of the CSM business, and another is our own product business.
Okay. In that case then, you said that about this two contract, that each contract will give you a revenue of about INR 3 crore-INR 50 crore on a lower side, if you conservative business side.
Correct.
Still you are going with this kind of a 20% margin or INR 120 crore of margin contribution from CSM business. Don't you think it is conservative guidance you are giving, particularly for the custom synthesis business? Already you have one contract in pocket with a INR 50 crore of revenue contribution on lower side.
Yes.
It may go up to INR 80 crore per annum.
I'll be very happy if I am proven conservative on this. Basically, lot of this also dependent on the Dahej site which is happening. Again, if you remember, I mean, from the time we gave that guidance, we had COVID phase I, COVID phase II, no international travel. We've kind of gone through all of that. Yes, we can still say that because look, even before we signed this contract, we already had a CSM business of about 10% of INR 300 crore, about INR 20 crore, INR 30 crore we had. We are saying INR 30 crore to INR 50 crore. We are somewhere between INR 60 crore to INR 80 crore already. Now, depending on what new business once I get it, I'm quite confident to reach at least INR 120 crore over next two years.
Especially once the Dahej site starts, we can arrange more customer visits or at least have a video shown to the customer or shown to the customer over video and get those approvals, we can see exactly whether it remains 20% or it becomes higher.
Okay. Sir, just one last question. Sir, molecules which you are selling through contract manufacturing, are these N minus 2 kind of molecules, or they are just N minus 6, N minus 7 kind of molecules?
Sir, they range from N minus 4, N minus 5 to N minus 2.
Okay. Thanks. Thanks a lot, sir. That's all from my end. Thanks.
Thank you.
Thank you. The next question is from the line of Parth Adhiya from B&K Securities. Please go ahead.
Yeah. Thank you for taking my question, sir. firstly, on the gross margin side, these are one of the biggest margins that you have delivered in past couple of quarters. basically, we have seen that lithium prices have been rising significantly, sharply. any benefit of the inventory gain that we had from the past low-cost lithium on these gross margins? Firstly, on that side.
Yeah. That's one of the contributors specifically in this quarter. I think more the trend is because of the change in the product mix.
Okay. Can you quantify the benefit from the lithium inventory gains in this particular quarter?
Not very significant, but yes, there was some benefit which we had.
Okay. Secondly, on the new capacity, once it has come up already and once it's ramped up-
The person you are speaking with has put you-
Hello.
Yes.
Basically, once a new capacity, which has come up and once it gets stabilized, want to understand the way forward you tap either new customer acquisitions or new business areas that you intend to tap or something which you have not been able to do or not have done before. Wanted to understand what areas would you like to tap or how would you go ahead with the customer acquisition, with the new capacity and specifically related to that?
I think, in some of our calls, historically, what we have said that so far, we have worked with few innovator customers. We feel we were waiting for this plant, which was right from scratch, designed from us, and we had no constraints, so we could implement all the changes that we wanted to. We feel once this is done, we can more aggressively and more confidently go to more wider range of innovator customers. One being, if they say, "Show me the capacity," we can show the capacity. Second is, if they want environmental clearance, at least for next five years, we have 3-4 Sorry, another 2.5-3 MPPs which we can add in Dahej, for which we already have our environmental clearance ready.
The site is now developed, so we have infrastructure ready and in fact, some of the utilities or some of the waste treatment facilities can even support one more MPP relatively easily. I think with all that, we can give more confidence to customer because if you look at last one and a half years, almost 2 years after we did the acquisition in Baroda, we were already working at full utilization levels. If I had to go to some customers and they say, "Okay, do this project," where's the capacity? When the capacity is coming? Now that we have a unit, I think we can approach to wider range of customers, innovator customers. Over the next 1 or 2 years, get them to the site, get the site approved, and then start new projects.
That will basically build the pipeline beyond FY 2023, FY 2024, for our growth with the new project which we get from them.
All right. Okay. Thank you.
Thank you.
Thank you. The next question is from the line of Manish Gupta from Solidarity. Please go ahead.
Dr. Harin, would it be possible for the company to share the gross margin for the organic and the lithium business separately if it is not confidential?
Manish, sir, basically, at present, we have not done it and again in lithium, we have very few customers. That's why if we start breaking them down, sometime we can have challenges. I mean, we will discuss this internally and we will take your suggestion, but at present, our policy is not to disclose that. Let me discuss internally and see if we would like to do that going forward.
Okay. My next question, sir, was that you mentioned that by FY 2024, you expect your advanced intermediate business to be 25%-40%. The earlier participant also alluded to your earlier guidance of custom synthesis being about 20% of the business on a base of about INR 650 crores by fiscal year 2024. The gross margin band, which was essentially about 38%-42%, say, two or three years down the line, what would that gross margin band be if your broad guidance is achieved?
Manish, sir, I think here, one of the questions which I'm still answering because when I look at the pipeline, let's say even advanced intermediates as well as CSM molecules, I'm not seeing one particular trend. There are some where there is one of the raw materials which is very high value. Especially if we are going to N minus 2, where I am building the molecule from up and when I'm going at N minus 3 or N minus 4, I'm combining it with another higher value RM. That's the reason why I'm hesitating to give this is, as we know more clearly which molecules and which projects will be, I'll be having a better idea of that. That's why I kind of hazard giving a number.
As a rule, yes, there the processing cost is going to be higher and the raw material cost will be lower, so it should improve. To what level will depend upon, from project to project, it keeps varying. That's why I am requesting a little bit more time to give a more long-term answer. What we see today, at least for this year, as I mentioned, we expect it to be in the range of 42% ± 2%, as opposed to 38% ± 2%, what we used to be before. 40% ± 2% what we used to be before.
Okay.
Yes.
Third question is that we are at the cusp of a fairly high growth trajectory right now. How do you think about your I would imagine there would be a little bit of a talent issue also right now in specialty chemical. My question was that if, for example, by FY 2024, we are looking at INR 650 crore-INR 675 crore revenue, have we hired all the talent we need to get to that? That will be a continuous process?
Have we hired all the talent that we would require? I think the answer would be, at least, we are fairly happy with the team which we assembled in last 1.5 years to 2 years, where at least each functional head that we have. We also had most of them already joined and with us between, let's say, 6 months to 1.5 years. I'm fairly confident that we already have that team. Yes, below the functional head, we will keep needing more people as volumes increase to support volume. I think from a management point of view, we have the team ready. We will have more operational people join over a period of time. I think this should see us for at least up to FY 2024, we are good.
Of course, it will be a continuous process, and we will constantly be looking for new talent, because by the time we are at FY 2024, we should be looking at FY 2025 and 2026 and getting ready for that.
Okay. Thank you.
Thank you. The next question is from the line of Dhavan Shah from ICICI Securities. Please go ahead.
Yeah, thanks for the opportunity, sir. I have a question on the custom synthesis business only. You mentioned that we are already working, I mean, supplying molecules to around 10 odd customers presently. If I look at the custom synthesis revenue right now, which is roughly INR 30 or INR 40 odd crores on annual basis. Per molecule size comes very low, and I understand that you already mentioned that we are working on N minus three, N minus four molecule. That size is smaller. If I would like to understand, based on the end user industry demand or the end user, the product size. How is the product size there, and how is that product growing, if you can share thoughts on that?
Thank you, Dhavan. I think, see, we have to understand that the CSM business as a whole started about three and a half year ago, where you can see even in our DRHP, there was a very small contribution of about 0.3, like INR 30 lakhs in the first year in which we kind of started this. There are some molecules when we started, we were very small, and these were mostly my existing bromine derivative customers asking me to do something little bit which they were doing, and they said, "Can you do this for us?" We also wanted to build confidence. Some of these molecules, yes, I agree, are lower value. Sometimes they don't repeat every year also. At the same time, that basically gave other customers confidence to give us more challenging molecules. We continue to do that.
Whether you call it CSM or whether you call it advanced intermediate, it's basically one thing. Only with the restriction that we can't sell it to anybody else, that particular molecule. As we say, as an example, the long-term agreement which we've signed, we said the revenue remains between INR 30 crore-INR 50 crore per annum on the lower side and can be higher in given years. I think, our hope is that once Dahej is set up, and once we are able to work more with our customers and show our capabilities in Dahej, in next 2-3 years, we will have more customers who will have contribution ranging from, let's say, INR 15 crore or INR 20 crore per molecule going up to, let's say, INR 50 crore or the target would be to even do higher.
Again, our normal standard preference is, if I were to say 10%-15% as a highest kind of revenue contribution from a single molecule, what Neogen thumb rule is. At INR 650 crore, that range comes to INR 60 crore-INR 100 crore. Again, when you do contract and that too, if there is a multi-year contract, we can even derive some comfort and take a higher risk or dependency on a single molecule. Let's see. That's the target. Again, we'll take some time for Dahej to stabilize, get these customers to see, and then get into contracts like this.
Right. If I would like to understand based on the present customer profile in the custom synthesis business, finally the end user industry more into the agrochem and pharma or is there any other industry also right now? Apart from that, do you foresee any molecule which can become sizable in the next 3-5 years from the present business line?
Yes, it's agro, it is pharma, and it's also non-agro, non-pharma customers. All three segments are part of the CSM customer pool. Yes, there are a few customers which have a good revenue potential, which can become, let's say, at least a INR 25 crore plus kind of molecules. Some which are in that INR 60-100 crore kind of range. We have to wait our time out. The challenge with the CSM business is because some of these molecules are very new, and also the customer decision and approval take time, so we have to be patient on that.
Right. You also mentioned that we are negotiating with 10 new customers for this custom synthesis. Here also the product market remains the same, or this will be a newer molecules for new customers?
When I mentioned molecules INR 25 crore plus and between 60-100, they also include this new customer. I was just talking as a whole. Okay. Some of the existing ones, as well as some of the new customers with whom we are working, just to kind of clarify. When we say negotiating, we are not negotiating. This is a process where you demonstrate something at stage one. As I mentioned earlier, something we've got only a process of 50 g. Then we do a kg level, then we do 100kg level, then we do few metric ton level. Each one, we have to show it to customer, then customer checks at his end, makes a decision, then it goes further. Some of them may drop at that intermediate stage also. It does happen. It's not uncommon that happens.
It's not a negotiation, but these are the customers with whom we are working through that process.
Okay. My last question is on the revenue part. I think you earlier mentioned also that these two new contracts, which can convert roughly INR 60-80 crore for the initial first year. Based on our quarterly run rate and this spillover sales impact also, plus your phase II will also come earlier than the expected length. Our INR 450 crore guidance, do you foresee that is very conservative for this current year, and we can overachieve this INR 450 crore guidance?
I'll be happy if I can, but we are already, let's say if I were to look at the INR 85 crore, kind of what we've been doing. More or less, if you look at my 3- 4 quarters, it's been INR 85 crore, so we are at INR 340 odd crore per annum, INR 340-INR 350. We are already expecting a 33% jump. I think, again, in Q2 also, not all reactors are coming online, et cetera. There is customer approvals involved, where sometimes we have to make get approved, especially on the pharma side of things. I think INR 450 is a decent target. If we are able to overachieve, I think the team will do really a good job. Also, there are still restrictions related to COVID-19. Even though operations have streamlined, but there are many things which are still not happening.
We are hoping in November, December, we heard some of the international exhibitions are going to start, so we can have more closer interaction with our customers and the visa restrictions and things like that. I think INR 450 is still in my mind quite decently good target. Let's stay with it for a while and then we see what happens further.
Sure, sir. Thank you so much, sir.
Thank you. The next question is from the line of Shanti Patel from Shanti Patel Investment Advisors. Please go ahead.
Sir, I just wanted to know the first five biggest customers, and what is the concentration of our sales to them?
Sir, I have a top 10 number readily available.
Okay, that will do.
Yeah. Generally, the top 10 customers normally as a whole contribute to about 40%-55% range of the top 10 customers. I think in this quarter also, it was more or less in the same lines.
Will you be able to name a few of them?
I'm sorry, sir. We have during our DRHP and post that in our investor presentation also. Some of the customers who had given us permission, their logos are mentioned. Because of confidentiality of business as well as some customer confidentiality, we are not able to name them. Yes, if you look at our historical DRHP disclosures as well as some names which we have given in our PowerPoint presentation, that should give us an idea. Broadly speaking, almost all the pharma companies in India are our customers. We work with almost all biggest pharma companies in India as well as generic producers in Europe and Japan, both in pharma space and also in agro space.
Including multinationals, right?
Including multinationals, yes. Like in India, engineering also, the names which we have there is Thermax, Voltas, Kirloskar. These are the main customers I have them. A Japanese company which is in the same line of business, which we've shared earlier, are the customers on the engineering space.
That's all. Thank you very much.
Thank you, sir.
Thank you. The next question is from the line of Kartik Bhatt, an individual investor. Please go ahead.
Yeah, thanks for the opportunity. Most of my questions have been answered. The only thing I wanted to ask is on this client concentration. While you mentioned top 10 would be 40%-45%, do you see this figure changing over the next one or two years given the CSM business, how it is panning out now?
I think even if we currently, let's say, look at our focus usually has been on top customers, which have carved more precisely. Yeah, let me see. If we, for example, get two or three customers. Even existing CSM is quite spread out as I answered earlier. It may increase slightly, when it comes to CSM business, if we have a multi-year contract with them and some kind of comfort that in case if they were to not have demand, we have some comfort. I think there, if it increases slightly, I would be okay, principally speaking. I still feel we will be, because the overall top line is also growing, I think we will still be in that 45%-55% range for the top 10 customers.
Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Dr. Harin Kanani for closing comments.
Thank you so much all the participants for joining the call. I hope we are able to satisfactorily respond to all your questions. It's always a pleasure to interact with you and get your queries and to answer them. If you have any more questions, please feel free to contact our investor relation team, CDR India, and we will address them. Thank you once again, and we look forward to connecting with all of you in the next quarter. We hope you and your family and your team members and colleagues remain safe in this challenging period. Thank you.
Thank you on behalf of.